Northrim Bank launched the Alaskanomics blog to provide news, analysis and commentary on Alaska’s economy. With contributions from economists, business leaders, policy makers and everyday Alaskans, Alaskanomics aims to engage readers in an ongoing conversation about our economy, now and in the future.

Northrim Bank launched the Alaskanomics blog to provide news, analysis and commentary on Alaska’s economy. With contributions from economists, business leaders, policy makers and everyday Alaskans, Alaskanomics aims to engage readers in an ongoing conversation about our economy, now and in the future.

Tuesday, March 08, 2016

On State Fiscal Policy, History Knocking at the Door

By Tim Bradner

In the din of intense debate, like what’s happening right now in Juneau, it’s hard to hear history knocking at the door. But in fact I hear knocking. Here we are–at a pivotal point in our state’s history.

We’re facing a tough set of facts: Oil prices at $30 per barrel; state revenues less than a third of what’s needed to balance the budget and a drawdown of available cash that will leave the treasury empty in four years, except for the Permanent Fund.

Of course, it’s not really a financial crisis. It’s a political will crisis.

We actually have plenty of money on hand, mainly several billion dollars of yearly revenue we’ve never touched, meaning the investment earnings mainly of the Permanent Fund.

This is not the Fund itself, which can’t be spent, but rather the earnings, which have always been available but never spent except for the annual Permanent Fund Dividends.

To illustrate, while the state’s petroleum revenues have gone into the tank, investments revenues, most from the Permanent Fund, are up smartly. Investment income increased from $2.58 billion in state Fiscal Year 2015, the budget year ended last June 30, to an estimated $3.77 billion for FY 2016, the current fiscal year, according to the Department of Revenue’s December 2015 state revenue forecast. For FY 2017, which begins in July, estimated investment earnings are $4.88 billion, according to the revenue department forecast.

So while oil income is down, investment income is up. Viewed that way, our situation is not as stark.

Gov. Bill Walker is widely given credit for being the first politician to call out the fiscal imbalance and propose solutions, including using some of the Permanent Fund’s earnings and also, by the way, asking Alaskans to pay some taxes. The governor’s specific proposals may not pass, at least all at once, but I believe a similar package will eventually be developed by legislators showing leadership.

This is history at the door: We’ll be taking the first step at diversifying our revenue base away from a 90 percent dependence on a volatile commodity–oil. This will help stabilize and diversify our state’s economy, in the long run, because we’ve allowed ourselves to become too dependent on the spending of state oil dollars.

In the meantime it will be a cold shower, however. Alaska jobs are starting to decline after years of slow, steady growth, and this will accelerate the news of more drill rigs being laid down on the North Slope. State budget cuts of several hundred million dollars won’t help.

However, state spending cuts appear to be the political price to be paid for the historic shift in our revenue base. The governor has proposed $100 million in spending reductions after last year’s $400 million cut to the operating budget, but it appears legislators want to go deeper, maybe equal to last year’s cuts.

Gunnar Knapp, at the University of Alaska’s Institute of Social and Economic Research, has estimated that each $100 million in across-the-board spending reduction in Juneau costs the economy about 1,300 jobs. If $400 million in cuts are made for next year’s state budget, the effect will be 6,500 jobs lost, according to ISER’s modeling. Some of that will be in retirements and attrition but the bottom line, loss of jobs in the economy, is still the same.

As a point of information, if we were to simply whack the budget to match available revenues, cutting spending by $3.5 billion (the possible size of our deficit) the effect would be, using the ISER estimates, to lose 45,500 jobs in the state’s economy, well over 10 percent of our workforce.

I can’t think of what that would be like, but it wouldn’t be pleasant. Losing 5,000 to 6,000 jobs will be tough enough on top of the oil patch jobs losses (which are likely to be far fewer lost jobs, actually). However, if it’s the price we must pay for our state’s leaders to muster up the courage needed to transform the finances, it’s worth it.

However, Rep. Mark Neuman, the co-chair of the House Finance Committee, points out that we’ve made substantial budget cuts in recent years that have gone largely unrecognized. In FY 2013 state general fund spending totaled $7.8 billion, a good share of that being the capital budget. In FY 2016, the current budget year, it is $5.4 billion including capital. FY 2017, the financial year beginning next July, will be substantially less.

As painful as this is, there’s a silver lining. We’ve talked for years about making structural fiscal changes but these never happened because we didn’t really have to do it. There was plenty of oil money, or if oil prices did drop they shot up again.

Let’s hope that cycle doesn’t repeat, and that prices stay down at least long enough for these decisions to get made. Legislators obviously are worried about the elections later this year and the effects on their careers, but here’s a chance for politicians to be part of history, a historical state policy change equal, in my mind, to the enactment of the Permanent Fund itself.